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The Effects of Forward-Versus Backward-Looking Wage Indexationon Price Stabilization Programs

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  • Mr. Joe Crowley

Abstract

A standard open-economy model is used to show that price stabilization programs are more likely to succeed if labor contracts specify forward-looking wage indexation. Compared with contracts specifying backward-looking wage indexation or wages based on static expectations, such contracts will result in a greater reduction in inflation with lower output costs, smaller misalignment of real wages, smaller outflows of reserves, smaller disruptions caused by policy announcements, and a reduced impact of some shocks during price stabilization programs. These results are generally true whether or not capital is mobile and whether or not expectations are rational.

Suggested Citation

  • Mr. Joe Crowley, 1997. "The Effects of Forward-Versus Backward-Looking Wage Indexationon Price Stabilization Programs," IMF Working Papers 1997/038, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1997/038
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    References listed on IDEAS

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    Cited by:

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    2. Víctor López Pérez, 2003. "Wage Indexation and Inflation Persistence," Working Papers wp2003_0303, CEMFI.

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